Dawson Geophysical Company — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Dawson provides onshore seismic data acquisition and processing services in the continental United States and Canada for major and independent oil and gas companies and multi-client data-library providers. This Form 10-Q covers the three and six months ended June 30, 2017; the financial statements are unaudited.
- Six U.S. crews were operating at quarter-end, with one Canadian crew operating for part of the quarter. The company reported eight U.S. crews currently operating and expected to continue through the end of the third quarter.
- Shares outstanding at August 1, 2017: 21.7 million.
Financial Results and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|
| Operating revenue | $30.5 million | $28.1 million | $72.4 million | $75.1 million |
| Loss from operations | $(15.4) million | $(13.3) million | $(27.5) million | $(23.9) million |
| Net loss | $(14.8) million | $(11.6) million | $(24.0) million | $(20.2) million |
| Loss per diluted share | $(0.68) | $(0.54) | $(1.11) | $(0.93) |
| EBITDA | $(5.4) million | $(1.5) million | $(7.3) million | $1.0 million |
- Q2 revenue increased 8.5% year over year, while six-month revenue declined 3.7%.
- Operating margin was approximately negative 50.5% in Q2 and negative 38.0% for the six months. Net margin was approximately negative 48.6% and negative 33.1%, respectively.
- Operating expenses increased 21.2% in Q2 and 7.5% year to date, primarily because of higher third-party charges. General and administrative expense rose 11.5% in Q2, partly due to severance, but declined 7.7% year to date.
- Depreciation and amortization declined to $9.9 million in Q2 and $20.0 million year to date, reflecting reduced capital expenditures in prior years.
Cash Flow, Liquidity, Debt and Capital Spending
| Balance Sheet or Cash Flow Item | June 30, 2017 | December 31, 2016 |
|---|
| Cash and cash equivalents | $35.2 million | $14.6 million |
| Short-term investments | $9.0 million | $40.3 million |
| Cash plus short-term investments | $44.2 million | $54.9 million |
| Total current assets | $71.2 million | $75.7 million |
| Total current liabilities | $20.0 million | $15.0 million |
| Property and equipment, net | $96.5 million | $110.9 million |
| Total stockholders’ equity | $147.7 million | $170.9 million |
- The current ratio was approximately 3.6x at June 30, 2017, compared with approximately 5.0x at year-end 2016.
- Six-month operating cash flow was negative $1.9 million versus positive $16.2 million in the prior-year period, primarily because of unfavorable working-capital changes.
- Investing activities provided $24.0 million, principally from net maturities of short-term investments. Capital expenditures were $7.7 million in the cash flow statement; management reported $6.1 million spent against a $10.0 million initial 2017 capital budget.
- Financing activities used $1.9 million, including $1.5 million of note repayments and $0.3 million of capital-lease payments.
- The company had $508,000 of equipment-related bank debt, $139,000 of insurance financing, and $157,000 of capital-lease obligations at June 30, 2017. Aggregate note and lease maturities due July 2017 through June 2018 were $647,000 and $157,000, respectively.
- The Sovereign Bank credit agreement provides borrowing capacity of up to $20.0 million, subject to borrowing-base and covenant limitations. The revolving line had not been drawn. The company was in compliance with all covenants at June 30, 2017.
Material Changes Versus the Prior Comparable Period
- Despite higher Q2 revenue, operating and net losses widened because operating costs grew faster than revenue.
- Year-to-date revenue declined and EBITDA shifted from positive $1.0 million to negative $7.3 million.
- Operating cash flow deteriorated by $18.1 million year over year.
- Cash increased by $20.6 million during the first six months, but primarily because short-term investments matured and were not fully reinvested; total cash plus short-term investments declined from year-end.
- Property and equipment declined by $14.4 million, while debt and capital-lease balances were reduced.
- The company sold its dynamite energy-source drilling operation in March 2017, recording an approximately $1.45 million gain and receiving a secured note receivable from the buyer.
Guidance, Outlook, Commentary and Risks
- No formal revenue or earnings guidance was provided. Management expects demand to remain at reduced levels through much of 2017 and stated that visibility into 2018 remains unclear.
- Management cited increased bid activity despite lower oil prices, but indicated that meaningful improvement in crew count and utilization likely requires better oil and natural gas prices.
- Second-quarter utilization was adversely affected by weather delays and project-readiness issues; effective crew counts ranged as low as two in April and reached six in June.
- Approximately three-quarters of revenue came from turnkey contracts, which can benefit from higher productivity but expose the company to weather and downtime risk.
- Key risks include dependence on energy-company spending, commodity-price volatility, project delays or cancellations, customer concentration and credit risk, low utilization, high fixed costs and capital requirements, weather and land-access disruptions, competition, equipment failures, and pricing pressure.
- Management recorded valuation allowances against significant deferred tax assets, limiting tax benefits on future losses. The six-month effective tax rate was 11.8%, but future losses may generate reduced or no tax benefits.
- The company is evaluating the effects of the new revenue-recognition and lease-accounting standards. The filing states that the lease standard is expected to increase reported assets and liabilities for operating leases, while the overall revenue-recognition impact had not been finalized.
- Management stated that pending legal proceedings are not expected to have a material adverse effect, and no material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether the planned eight U.S. crews remain active and achieve sustainable utilization after the third quarter.
- Whether oil and natural gas prices and customer capital spending support improved seismic demand and pricing.
- Whether operating cash flow returns to positive levels or continued losses consume the company’s cash and investments.
- The availability of borrowing capacity under the asset-based credit facility if receivables or equipment values decline.
- The collectability of the $1.6 million equipment-related notes receivable and the company’s exposure to customer payment disputes.
- The eventual balance-sheet and earnings effects of the pending revenue-recognition and lease-accounting adoptions.
